Apple’s iPhone was arguably the hottest piece of consumer
electronic for 2007. Those who purchased iPhones were expected to
activate new contracts on exclusive wireless networks in the U.S. and
parts of Europe. This proved difficult for those who desperately
wanted iPhones, but were either unwilling or unable to commit with
AT&T – such as those who live outside of the officially
supported territories.

Such restrictions have led savvy cell phone enthusiasts to acquire
iPhone hardware, but evade the attached contract. Those who wish to
run iPhone have to unlock
the mobile before it may run on any outside GSM network.

According to analysts cited by Bloomberg,
around 1 million of 3.75 million iPhones sold last year were unlocked
to run on outside networks. Since Apple receives an estimated several
hundred dollars in royalties for every iPhone contract, Toni
Sacconaghi of Institutional Investor magazine believes that Apple is
losing $300 to $400 million in future revenue due to the abundance of
unlocked phones.

"The prevalence of unlocked iPhones presents a significant
strategic dilemma to Apple," said Sacconaghi, adding that
unlocked iPhones generate 50 percent less revenue and as much as 75
percent less profit than those under contract. Furthermore, new
carriers may be reluctant to sign with Apple due to the unlocking
market.

The prevalence of unlocked iPhones is something Apple is fully
aware of, but doesn’t appear to be addressing. "The number of
iPhones bought with the intention of unlocking was significant in the
quarter, but we are unsure how to reliably estimate the number,"
Chief Operating Officer Timothy Cook told analysts during Apple’s
first-quarter
results reveal. "We are unsure when all the recipients will
activate."

Unlocked iPhones aren’t ideal for Apple’s business model, but
aren’t completely bad either. Mike Abramsky of RBC Capital Markets
wrote
in a report that unlocked phones, "though a headache for
carriers, are financially positive for Apple, and in our view bode
well for global iPhone demand, and for Apple exceeding its 10
million, 18-month target."

"Spreading the rumors, it's very easy because the people who write about Apple want that story, and you can claim its credible because you spoke to someone at Apple." -- Investment guru Jim Cramer